US Treasuries: Contrarian Bet Against Market Consensus
In May’s Gloom Boom & Doom report, Marc Faber starts the market observations part of the report with a chart and analysis of the latest Barron’s Big Money Poll.
In the Barron’s latest Big Money poll (see Barron’s of April 24, 2015),
“a record 50% of respondents categorize themselves as neutral about the market’s prospects through year end…. That’s the highest neutral reading since the spring of 2005, when 40% were sitting on the fence, and a sharp increase from last fall’s 31%. A record 50% of Big Money managers say they are neutral about the prospects for stocks this year; 45% call themselves bullish, and 5% claim to be bears.”
Nonetheless, when asked whether they were bullish or bearish about different asset classes, a different picture emerges. An overwhelming 82% of Big Money Managers were bullish about U.S. Stocks compared to the just 18% who were bearish:
Dr. Faber stated: “There is nothing unusual about the fact that Big Money Managers are bullish about stocks (83% of them are bullish about European stocks), but what is really remarkable is that only 12% of them are positive about US Treasuries (88% are bearish).
Marc Faber Still Long Some US Treasuries
Even though Marc Faber sees crystal clear that sometime in the future interest rates will be much higher, he doesn’t believe the current market consensus is thinking critical enough and will be right about interest rates rising. He said:
“Just remember how many experts lost moneyshorting JGBs in the last few years.”
So from a contrarian point of view, stocks are a sell and bonds are a buy. This is especially true if big money poll predictions are usually wrong about bonds and that’s exactly the case, Marc shares:
“Professional Forecasters have consistently failed to forecast the future yield on Treasury Notes accurately”
As seen on the graph, in the last 10 years, professional forecasters are as wrong as they could be and we can hardly even rank them professionals judging by the chart. Today, the situation is the same, they again forecast rising interest rates.
Of course, Marc Faber notes that it’s not rational for central banks and investors to buy bonds now, when the yields are low and states that the right time to buy was in the 80s, when interest rates were high, but one should be careful as it’s hard to call bull/bear market ends, same as it was with the Japanese bond market.
Marc Faber Not Sure Whether to Trust USD Strength
Marc Faber is also not sure if the USD strength is for real. If the US Dollar is to continue it’s uptrend, then why US treasuries have yields lower than Spain and Italy and many European countries, plus Japan? Currently the market consensus is that the USD will continue to go up. He also said that he was at loss to understand why the ECB is buying negative interest rate bonds. We at Octafinance, believe it’s a pure madness.
Dr. Doom Prefers Short Yen Than Long Nikkei/TOPIX. Not Short Yen or Euro Yet
“The only reason I am currently not shorting the Yen or the Euro is that the bullish consensus about the US dollar is extremely high.”
But he is not a USD bull. He thinks that the FED won’t rise rates this year and they will find new excuses not to tighten. The economy has also deteriorated and it’s trend is not healthy enough. He wouldn’t even rule out a new QE program by the FED in case the economy slows down more.
He also touched on Japan’s experiment and noted that BOJ’s balance sheet is exploding to the upside and outperforming other central banks. He feels the yen will be sacrificed during this Abenomic’s experiment.
Mining Companies The Only Asset Class With Significant Upside Potential: Gold Miner ETF (GDX)
According to him, one should always hold diverse portfolio of assets such as: properties, equities, bonds, precious metals. But today, Marc Faber sees mining companies as the only asset class with very big upside potential. He also noted that mining stocks such as Newmong, Barrick are acting well and their price action probably reveal something. Even though he prefers holding physical precious metals, he recognizes the probable upside potential of mining stocks – gold miners etf (gdx).
Gold Miner ETF (GDX) Price Chart
Source: Octafinance Interpretations + Rightedgesystems
We at Octafinance, believe that if GDX breaks the $23.5 per share barrier, this will be a valid 1-2-3 reversal pattern as per Victor Sperandeo‘s terms and the triangle will be for sure resolved to the upside. This will be a good risk-reward opportunity to trade gold miners, with a stop below the breakout bar’s low.
Asia’s Start Performers and USA Equities Bull Market Red Flags
At the end of the Gloom Boom & Doom report, Marc also notes that even though investors believe that US equities are the only game in town, the S&P Index is up less than 3% so far in 2015, while most European markets are up by between 5% and 12%, Asian markets and especially the Shanghai and Shenzhen have been the star performers with 30%+ returns.
He is worried that margin debt in the USA has reached new highs and the breadth is also deteriorating. At the same time the equity flows couldn’t bring an up-rise and have broken their correlation with the market. All this doesn’t look good for the future health of the US equities bull market.
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